Examining the Denial of Input Tax Credit for Sales Promotional Goods under GST

Input Tax Credit (‘ITC’) is not available on goods purchased for sales promotional activity, as recently held by the Hon’ble Madras High Court in the case of M/S. ARS STEELS AND ALLOY INTERNATIONAL PRIVATE LIMITED, REPRESENTED BY ITS DEPUTY DIRECTOR N. PRABU VERSUS THE STATE TAX OFFICER, THE DEPUTY COMMISSIONER (CT) , CHENNAI - 2024 (12) TMI 398 - MADRAS HIGH COURT.

The Hon’ble Madras High Court has held that goods purchased for sales promotional activities are subject to the restrictions outlined in Section 17(5)(h) of the CGST Act. The said provision applies to goods that are disposed of by way of gift or free samples. Accordingly, the hon’ble Court has held that input tax credit of ‘Gold coin’ and ‘T-shirts’ purchased for distribution as sales promotion activity would not be available.

The relevant extract of the judgement is reproduced below for ready reference: -

28. Be that as it may, since the provisions of the respective GST enactments are clear in terms of Section17(5)(h) of the Act, the petitioner was not entitled to avail the input tax credit on T-Shirts and Gold Coins purchased for Sales Promotional Activity.”

In the above manner, the hon’ble Court has held that in terms of the restrictions imposed by Section 17(5)(h) of the CGST Act, input tax credit on goods purchased for sales promotional activities would not be available.

Our take

In arriving at the said decision, the hon’ble Court has equated sales promotional activities with disposal of goods by way of gift or free sample. While the above legal position appears to be unquestionable and in line with the Circular No. 92/11/2019-GST dated 7^th March 2019. Taxpayers can explore smart ways to structure the activities in order to avoid the restrictions imposed by Section 17(5)(h) of the CGST Act.